KDP: Headwinds From Allied Brands Blunt Solid Q1

Keurig Dr Pepper (KDP) reported a net sales increase of 2.5% for the first quarter of 2019, remaining on track to hit its long-term growth targets despite taking a hit in packaged beverages.

Net sales more than doubled from the same period last year, jumping from $948 million to around $2.5 billion, primarily reflecting the impact of the merger. All four segments of KDP’s business — Packaged beverages, Beverage Concentrates, Latin American Beverage and Coffee Systems — registered an increase in underlying net sales.

“Our first quarter results represent a good start to the year, with strong EPS delivery and all four segments registering underlying net sales growth. In addition, our in-market performance was also solid, as we grew retail dollar consumption across the majority of our portfolio and held or grew market share in nearly all categories,” said KDP CEO Bob Gamgort in a press release. “Our cash flow generation remains strong and we continue to reduce debt in line with our deleveraging targets. We remain confident in our targets for 2019 and our long-term value creation framework.”

In Packaged Beverages, a 5.4% unfavorable impact from changes to KDP’s Allied Brands portfolio — which has been marked by both notable exits and investments over the past year — stunted growth. Despite a 1.4% increase in underlying sales, net sales in the segment decreased 5.3% during the first quarter, falling from $1.18 billion to $1.12 billion. Calendar changes also had an unfavorable impact of 1.2% on net sales.

Operating income in the segment was $160 million, about even from the same period. Net price realization increased 2.3%, but volume declined 0.9%.

During the call, Gamgort said that unfavorable impact from allied brands “will continue to be a headwind until Q4. He praised premium water brand CORE for its “exceptional” 60% increase in retail sales during the quarter, while also highlighting growth driven by Dr Pepper, Canada Dry, Peet’s, FORTO and Mott’s.

Looking ahead to summer innovations, Gamgort said to look out for three new Snapple lemonade flavors and a limited edition Dr Pepper SKU tied to July’s big screen Spider-Man sequel (first spotted at NACS 2018).

Operating income in the segment was $160 million, about even from the same period.

In the Beverage Concentrates segment, net sales increased 4.8%, fueled by growth by Dr Pepper, Crush and relative newcomer Big Red. Operating income within the segment advanced 12%. Volume was down 2%, as was net fountain foodservice sales.

Coffee Systems saw a 2.1% increase in net sales during the quarter. K-Cup pod volume was up 7%, though net sales were down, which KDP attributed to “the impact of significant volume growth of branded partners in the first quarter of 2019.”

Long term, KDP remains on track to hit projections of $600 million in synergies by 2021. The company is also paid back $400 million in merger-related debt during the quarter.

Wells Fargo Securities analyst Bonnie Herzog described the results as “mixed” but said the company’s full year guidance remains largely unchanged. While noting “muted” underlying net sales growth

“All in, we continue to think KDP is on the right track with its merger integration, although today’s mixed results do little to get us incrementally more excited,” Herzog wrote. “We expect any outperformance today to be limited.”

During a Q&A segment with investors and media, Gamgort offered his perspective on KDP’s current approach to M&A. He said that the company’s main focus wasn’t so much sourcing opportunities but “making sure we don’t overpay,” noting that it makes more sense for the company to partner with early stage brands in emerging categories than pay “crazy high multiples.”

“The question is can we create win-win scenarios where we have a price point that creates value and doesn’t destroy it?” he said.

KDP’s game plan for packaged beverage will also involve improvements to its national DSD network and attacking categories from multiple angles, according to Gamgort. Commenting on the energy drink market, he noted that fragmentation within the category has provided an opportunity to leverage the company’s multiple offerings — such as natural energy drink Runa, energy coffee FORTO, Big Red’s XYIENCE and the recently announced Adrenaline Shoc — through its distribution system.

“Within these large, fast growing categories, we don’t have to be number one or number two (top seller),” he said. “We just need a meaningful business that is incremental to us and allows us to participate. We see white space in energy.”